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2015 (12) TMI 293 - ITAT MUMBAI

2015 (12) TMI 293 - ITAT MUMBAI - TMI - Rejection of claim for deduction u/s 10B - tax authorities have come to the conclusion that the assessee has not carried on any manufacturing activity - Held that:- The assessee has imported diamonds, purchased gold locally and exported the jewellery. Thus, the articles purchased and the articles exported are two different articles. The export of jewellery cannot be carried out without manufacturing the same. The assessee has also explained about its manuf .....

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B.R.BASKARAN (AM) For The Assessee : Shri K Gopal and Ms.Neha Paranjape For The Revenue : ShriL K S Dehia ORDER PER B.R. BASKARAN (AM) The appeal filed by the assessee is directed against the order dated 20.2.2014 passed by Ld CIT(A)-34, Mumbai and it relates to the assessment year 2010-11. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the rejection of the claim for deduction u/s 10B of the Act. 2. The facts relating to the issue cited above are discussed in brief. The as .....

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ar under consideration, the assessee claimed deduction u/s 10B of the Act to the tune of ₹ 14.31 crores. The assessing officer examined the said claim of the assessee and took the view that the assessee has not carried out any manufacturing activity and accordingly held that the assessee is not eligible for deduction u/s 10B of the Act. The grounds on which such a view was entertained by the assessing officer have been summarized as under in the assessment order:- 4.8 If we look the facts .....

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s of the assessee during survey on the address given by the assessee. They could not be found and at the given address and the persons staying there also did not know about them. When confronted, the assessee failed to provide their address and details. It is surprising that in such a sensitive business of diamond jewellery, the assessee did not have verification of workers. iv) The assessee has claimed very meagre amount towards payment to workers, that too by cash, for both, casting of gold an .....

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ss of labourers, when inquired during survey. It is not possible that such basic details are not maintained in this line of business. No satisfactory reply could be given by the assessee. vi). The Hon'ble Supreme Court in the case of Durga Prasad More 82 ITR 540 and in the case of Sumati Dayal 214 ITR 801 has held that test of human probabilities should be applied to verify whether any transaction is real or an attempt has been made to give it a colour of reality. In the case of the assessee .....

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are claimed to have been doing labour work for precious diamond jewellery, when they could not be traced by the Inspectors. The expenses for job work are that meagre as compared to turnover and shown as paid by cash. Hence, if we apply all these evidences to test of human probability, it emerges that no manufacturing activity was carried out by the assessee. Hence, applying the preponderance of probabilities and entire circumstances as discussed above, it is proved beyond doubt that the assessee .....

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g within the purview of section 10B is concern the income tax Act is silent on this issue hence the SEZ Act 2005 has to be referred. In the SEZ Act 2005 word manufacturing has been defined as under: "manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blendinq, repair, remaking, re-engineering and .....

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d casting and diamond cutting & polishing, which can be claimed as manufacturing, are done in outside market. Casted gold and cut & polished diamond are the products which have a distinctive name, character or use but studding the readily cut & polished diamond in to the out sourced casted gold does not satisfy the condition of being a eligible manufacturing activity. Mere studding of diamond cannot be called a manufacturing activity eligible for deduction u/s 10B. Hence, the assesse .....

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the section 10B of the Act, of carrying out eligible manufacturing activity, hence the deduction under section 10B of the Act claimed by the assessee is disallowed and added back to the income of the assessee. 4. The Ld CIT(A) also confirmed the view taken by the AO. The Ld CIT(A) also referred to the statements recorded from employees of the assessee and observed that all the workers of the assessee are actually employed in another concern named M/s Blackstone Gem & Jewellery, Surat. Accor .....

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are purchased locally. He submitted that the import of diamonds is carried out at the control and supervision of Customs and Excise authorities and they affix their signatures in the purchase register maintained by the assessee. Accordingly he submitted that the import of diamonds stand proved by the assesee. The Ld A.R invited our attention to the copies of purchase register to prove the above said submissions. He further submitted that the assessee has maintained finished stock register, where .....

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aid registers have also been inspected by the Excise and Customs authorities. 6. The Ld A.R submitted that the assessee gets the gold melting work and conversion of 24K gold into 14K/18K gold are done through third parties on job work basis. Then the required dies are prepared in wax and required mounting is produced there from. The mountings so produced are cut into pieces then scrubbed to bring them into proper shapes. Wherever necessary, required welding is also done. Thereafter diamond is fi .....

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ting and wages are low. Further the AO noticed that the addresses given by the workers were wrong. He submitted that the assessee has furnished only the details available with it, which was furnished by the concerned labourers. Hence the assessee should not be found fault with, if the worker was not available at the given address. He submitted that the jewellery is manufactured under hand process and the same is supervised by its staff. He submitted that the assessing officer did not comment upo .....

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h is paid to the Central excise department for deputing an officer to accompany the goods at the time of its movement outside the official hours. The relevant audit report is attached at page 380 of the paper book. He submitted that the MOT charges so paid further vindicate the point that the assessee has actually manufactured jewellery. He further submitted that the Central Excise department has accepted that the assessee is manufacturer of jewellery. Accordingly he submitted that the tax autho .....

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V/s ITO (2010) 122 ITR 255 (Mumbai) 7. The ld D.R, on the contrary, submitted that the survey operations conducted by the revenue at the Bombay premises and Surat premises clearly proved that the assessee does not possess any machinery at both the places. Further, the assessee has claimed to have engaged only four workers. However, the said workers were not available at the given addresses. Further the assessee has accounted for labour charges of ₹ 1,18,918/- and Salary and wages of ͅ .....

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ssee has not accounted for expenditure towards silver/copper. Accordingly he submitted that the above said deficiencies clearly prove the assessee has not carried out any manufacturing activity. 8. He further submitted that the assessee had prepared a Project report for obtaining approval from SEZ, wherein the estimated cost of imported capital goods was shown at ₹ 60.00 lakhs. However, the assessee has shown a sum of ₹ 1.35 lakhs only as its fixed assets and the said assets mainly c .....

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which further strengthens the claim of the revenue. He further submitted that though the partner of the assessee firm explained the process of manufacturing at the time of survey, yet there are no evidences to back the said claim of the partner. 9. The Ld D.R submitted that the partner of the assessee firm submitted during the course of survey that the labourers manufacturing gold portion of the jewellery are given the details of height and width of the diamond so that they can manufacture the .....

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Shri M.H. Gandhi, admitted that he was not aware of manufacturing activity and he could not furnish the labourer details. He further submitted that the paper documents maintained by the assessee only show the receipt and outgo of the materials/goods and they are not sufficient to prove the manufacturing activity‟ in terms of sec. 10B of the Act. 10. He further submitted that the assessing officer has taken alternative view that the manufacturing work done through job work given to outsider .....

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anufacture of jewellery for the reasons that the expenditure booked by the assessee on labour and wages are not proportionate to the volume of sales declared by the assessee. During the course of hearing, the Ld. DR also pointed out that the assessee has not incurred any expenditure towards the consumables. Further, the survey carried out by the Revenue authorities revealed that the assessee did not possess any machinery. On the basis of the above stated facts, the tax authorities have come to t .....

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s to manufacture or produce articles or things or computer software. Hence the one of the conditions to be satisfied in order to avail deduction u/s 10B of the Act is that the undertaking should manufacture or produce articles or things. In the instant case, the tax authorities have taken the view that the assessee has not manufactured the jewellery for the reasons stated in the preceding paragraph. 14. With regard to the contentions of the revenue, the ld. AR has submitted that the jewellery ma .....

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ad to the presumption that there was no manufacturing activity. The Ld A.R further submitted that the jewellery so manufactured has been duly exported under the supervision of Customs authorities. Accordingly he submitted that the activities carried on by the assessee would fall in the category of manufacturing . 15. We notice that the tax authorities have not expressed any adverse view on the import of diamonds, purchase of gold and export of jewellery. The ld. AR has further submitted that the .....

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and manufacture of jewellery. A perusal of the said documents would show that the assessee has duly recorded the details relating to the same and they have also been inspected by the Central Excise and customs authorities. Further, it is noticed that the Superintendent of Central Excise have conducted audit relating to collection of MOT charges and the copy of audit report has also been furnished in the paper book. We understand that the Merchant Overtime Fee (MOT Charges) are the charges which .....

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our view, supports the case of the assessee. In fact, the records maintained by the assessee with regard to import of diamonds, purchase of gold and export of jewellery are not disputed by the tax authorities and they also support the case of the assessee that it is manufacturing jewellery. 16. In our view, the absence of huge plant and machinery in the premises of the assessee cannot be a ground to suspect the claim of manufacturing, since the assessee has explained that the gold melting and m .....

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erted the same into gold mountings through outsourcing activities have not been disproved by the tax authorities. 17. Since the labour charges and wages were found to be lower vis-a-vis the export value of jewelleries, the tax authorities have doubted about the claim of manufacture. However, we notice that the tax authorities have not brought any material on record to disprove the records maintained by the assessee. They have also not taken any steps to ascertain the fair market value of labour .....

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ssing officer has not rejected the books of accounts nor did he point out any defects in the books of account, meaning thereby, even though the assessing officer had commented upon the expenditure incurred by the assessee, he did think it necessary to examine about the adequacy of expenditure booked by the assessee. 18. The tax authorities have also pointed out that the assessee could not furnish copies of standard designs of jewellery and hence they have taken adverse view. However, the fact th .....

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f audit report given by the tax auditor for AY 2011-12, wherein the tax auditor has stated the nature of business as Manufacturing Industry - Others . 19. We may now refer to some of the decision relied upon by the assessee. In the case of Ekta Exports Pvt Ltd (supra), the Hon‟ble Calcutta High Court has taken the view that the activities relating of fixation of level, burron, ironing, packing garments involved in conversion of cloth into shirts would amount to manufacturing, since cloth a .....

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